Fitch downgrades El Salvador – What next for the country?

Traditional finance is bringing all to bear on the small Central American country of El Salvador that had the temerity to step out of line and adopt Bitcoin alongside the US dollar as legal tender. Fitch Ratings has now downgraded the country from B- to CCC.

It can not be doubted that El Salvador caused consternation in traditional financial circles when it announced that it would be the first country in history to adopt bitcoin as legal tender. Poking a wasp’s nest with a stick might have received a similar reaction.

The International Monetary Fund has warned and warned again of what will become of the poor country and its citizens if president Bukele does not change course and annul such a drastic action.

Now the US credit ratings agency Fitch has weighed in and has lowered El Salvador’s long-term issuer default rating from B- to CCC. The agency cited “policy unpredictability” together with the “adoption of Bitcoin as legal tender” for its reasons for doing so.

El Salvador does have a lot of debt to pay, and particularly in the short term the agency is warning that the country will find it increasingly difficult to meet these payments.

However, the country’s president Nayib Bukele is counting on a Bitcoin rise in price to help his country out of its difficulties. Also, the issuance of a Bitcoin Bond that will pay investors 6.5% a year is due to launch on 15 March.

The bond issuance is initially looking like a successful project as it is already oversubscribed by around $500 million. The proceeds from the bond sales are going to be put into further big bets on Bitcoin, as $500 million will be put towards bitcoin mining by using the clean energy from  El Salvador’s volcanoes. 

A Bitcoin City is to be built at the foot of a volcano, while another $500 million will be spent on more purchases of bitcoin, which will add to the purchases that the country has already made. 

The success of the Salvadoran president’s audacious plan is obviously based on the premise that the value of bitcoin will rise over the coming months and years, and given its history of massive gains, it could be expected that this might well happen.

If it does, then it probably sounds the death knell for the fiat monetary system as we know it. Obviously this may still take quite some time, but if another country or two were to follow suit, then things could get very interesting.

Knowing just how much is on the line here, it would be expected that governments, central banks, and world financial organisations might just have a couple of tricks up their sleeves still. World financial history will depend on how this all plays out.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.